## Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal

_IMF Working Papers, April 1, 2010_

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## Bibliographic details
- Authors: Jorge A Chan-Lau
- Published: April 1, 2010
- Series: IMF Working Papers

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### Summary
- Author: Jorge A Chan-Lau
- Date: April 1, 2010
- Core observation: The recent financial crisis has highlighted once more that interconnectedness in the financial system is a major source of systemic risk.
- Central proposal: Levy regulatory capital charges based on the degree of interconnectedness among financial institutions, specifically grounded on each institution’s incremental contribution to systemic risk.
- Intended effects:
  - Internalize the negative externalities associated with too-connected-to-fail institutions.
  - Provide managerial incentives to strengthen an institution’s solvency position.
  - Reduce excessive homogeneity and reliance on the same counterparties in the financial industry.

### Proposal mechanics and analytical basis
- Basis for charges: Institution’s incremental contribution to systemic risk (as stated).
- Analytical elements mentioned: loss distribution, probability of default.
- Targeted risks and subject areas: Asset valuation, Banking, Credit risk, Financial crises, Systemic risk.
- Keywords explicitly used: capital charge, financial system, loss distribution, probability of default, WP.

### Policy implications and recommendations
- Implement capital charges calibrated to incremental systemic risk to:
  - Encourage institutions to internalize negative externalities from interconnectedness.
  - Create incentives for managers to improve solvency and diversify counterparty exposures.
  - Mitigate systemic vulnerability stemming from highly connected institutions.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/regulatory-capital-charges-for-too-connected-to-fail-institutions-a-practical-proposal-23753_